UPDATE: Drexel Hamilton Starts Avago Technologies (AVGO) at Buy

(Updated - November 10, 2015 2:32 PM EST)

Drexel Hamilton initiated coverage on Avago Technologies (NASDAQ: AVGO) with a Buy rating and a price target of $156.00. Analyst Cody Acree expect the combination with Broadcom (NASDAQ: BRCM) to generate 2017 revenue over $17 billion, and EPS of over $12.40.

"We are encouraged by the BRCM acquisition as there are many areas where product, customer, and application synergies should create opportunities for faster growth. The combination of the two strong engineering teams should create opportunities in areas neither company heavily participates in today," said Acree. "We see the most revenue synergies between AVGO’s wired infrastructure ASICs and optical products and BRCM’s Ethernet Switching and PHY portfolio and obvious opportunities with AVGO’s RF business and BRCM’s WiFi leadership. Lastly, we believe BRCM’s profit margins should move fairly quickly toward AVGO’s targets, given AVGO’s history of management and spending discipline."

The analyst continued, "The strategy of high performance comms offers high growth, limited competition, and high gross margins, which Avago has capitalized on to create a balance sheet that allows theses large acquisitions. AVGO’s profit margins are near the top of the industry, with only LLTC having higher op margins, and only a handful having higher gross margins. With underlying market growth of 45%+ and smartphones only increasing in complexity, wireless comms will likely continue to be the largest revenue contributor, and the dominant Avago topic among investors."

Acree added, "Wireless is not only AVGO’s largest division, but also where it’s seeing the most revenue dollar growth, and where the firm has a market share more than 2x its next competitor (AVGO 65-70%, QRVO 25%-30%). The RF market is expected to more than double by 2020, with the majority of this growth coming from the filter market, where AVGO’s lead in premium filters makes it particularly well positioned to benefit."

For an analyst ratings summary and ratings history on Avago Technologies click here. For more ratings news on Avago Technologies click here.

Shares of Avago Technologies closed at $126.50 yesterday.

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